What happened

Select water utility stocks were hot in August. American States Water (NYSE:AWR), American Water Works (NYSE:AWK), and California Water Service (NYSE:CWT) returned 19.9%, 11.4%, and 6.1%, respectively, last month, according to data from S&P Global Market Intelligence.

Meanwhile, the S&P 500's performance was all wet, as the index, including dividends, fell 1.6% in August.

Drop of water falling into a body of water causing ripples.

Image source: Getty Images.

So what

We can attribute the strong August performances of American States, American Water, and California Water -- which are the three largest publicly traded pure-play water utilities operating in the United States by market cap -- largely to a couple of macroeconomic factors. First, investors have become increasingly anxious about an impending recession due to slowing global growth and the Trump administration's escalating trade war with China. So, they've been pouring money into investments that are viewed as safe havens, including dividend-paying utility stocks. Demand for the products and services that utilities provide tends to remain relatively stable during economic downturns.

Second, interest rates have come down with some economists predicting further declines. In late July, the Federal Reserve cut the federal funds rate by 25 basis points, or 1/4%. When interest rates on U.S. Treasury securities drop, dividend-paying stocks become relatively more attractive to income-focused investors. 

AWR Total Return Price Chart

Data by YCharts.  

American Water Works, which is based in New Jersey, is the largest water utility by market cap and the most geographically diverse. It has a presence in 47 U.S. states and one Canadian province, with regulated water and wastewater operations in 16 states.

American States and California Water are both headquartered in the Golden State. American States has all its (regulated) eggs in one basket -- though California is a mighty big basket -- while California Water has regulated operations in California, Washington, New Mexico, and Hawaii. However, the vast majority of its regulated business is in its home state, which accounted for about 94% of its total customer connections at year-end 2018.

American Water and American States also have market-based businesses that operate and maintain water systems on military bases throughout the U.S. via super-long-term contracts.

Expanding our lens beyond one month, you can see that American Water and American States stocks have been having a great 2019, with each beating the market by roughly 2-to-1. Shares of California Water are somewhat lagging the market.

AWR Total Return Price Chart

Data by YCharts.

The 10-year story is similar to the 2019 one in that American Water and American States stocks have significantly outperformed the S&P 500. Shares of California Water have slightly beaten the market.

AWR Total Return Price Chart

Data by YCharts.

Now what

Granted, the larger water utility stocks have run up in 2019, but select ones still make for solid long-term investments, in my opinion. American Water and American States are both good choices in this space.

If you use dollar-cost averaging you'll avoid the risk of buying all your shares at a market peak. Dollar-cost averaging involves investing the same dollar amount at some set interval (such as quarterly) until you build your full portion in a stock.